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Pass it on: the power of viral loops

This article was taken from the November issue of Wired UK magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content bysubscribing online

It's two Heinekens into a lazy Tuesday afternoon and James Hong, a 27- year-old dotcom refugee from Mountain View, California, was listening to his flatmate, Jim Young, an electrical-engineering graduate from Berkeley, describe a woman he had met at a party the previous weekend. Young, also 27, insisted she was a "perfect ten";

Hong didn't believe him. His flatmate had a thing for "goth chicks" while Hong's own tastes were more Abercrombie & Fitch. What the world needed, they agreed, was a metric to rate someone's looks reliably.

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Young's "perfect ten" comment got Hong thinking. What if you could rate someone's looks by opening it up to a vote - so that a person's attractiveness could be based on whatever a large community of people judged it? All they needed were pictures and a scale from one to 10 for site visitors to click.

Hong scoured the web for candid shots while Young got cracking on the digital infrastructure. Because of the way they designed the site, users couldn't find out poll results until they voted and the next page loaded. They purposely placed the aggregate score on the left side, over a smaller version of the picture, while the next picture was significantly larger and centred. The interface demanded engagement, and this made it sticky; if a site retains visitors' interest, it has the potential to be popular and spread by powerful word-of-mouth endorsement.

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On October 9, 2000, AmIHotOrNot went live. Hong emailed 42 friends: "Here's a website that Jim and I made - be nice," he wrote, and inserted a link to their own pictures. The visitors pinging the site quickly grew well beyond Hong's 42 friends. It didn't take an epidemiologist to recognise a viral spread. By the end of the first day, 37,000 visitors had found the site; by its eighth day the site had 1.8 million daily page views. Hong, who had slept only eight hours in those eight days, was shaking.

Hong soon estimated that AmIHotOrNot would cost $150,000 in bandwidth in its first year. The more successful they were, the greater the chance that they could go bankrupt. He had no idea how the site would make money and, frankly, he didn't care. All he knew was that he had stumbled into an insanely viral scheme, but had to figure out how to keep it going before the levees gave way. Six weeks after launch, the site had attracted three million page views a day and more than 3,000 photos. Advertising made the most sense as a way to earn money, but a number of users had been posting nude photos, and pornographers were tricking users into passing on their emails so they could spam them. Hong knew if there were objectionable material posted they couldn't attract advertisers, so he and Young came up with their new motto, "Fun, Clean and Real".

They issued basic rules: no celebrities, minors, models or porn, no group photos, advertisements or anything with contact information such as email addresses or phone numbers.

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They created a community monitoring system whereby users could click a link under an inappropriate picture; based on an algorithm, they would delete anything that was tagged too often. They turned to their community to act as moderators; each applicant was required to pen an essay, and those chosen to moderate were told to reject inappropriate pictures, ads or anything containing contact details. With hundreds of users trolling the site, they could filter what was posted.

After this went into effect, it didn't take long to land an advertising network. Although click-through rates were low - in the order of 0.2 per cent - the immense number of page views still made it a good proposition. Within two months, they had seven million page views a day and had collected 130,000 photos. Three months after launch, they broke into Nielsen's top 25 advertising domains and had generated $100,000 in ad revenue. In 2001, the name was shortened to HotOrNot.

Just when things seemed to be humming along, the web ad market stumbled, a victim of the dotcom bust; advertising rates dropped. "Can we charge for anything?" Hong wondered. The answer was staring him right in the face. After they had launched the community monitoring system to stamp out pornography, they received emails from users complaining that they had been enjoying meeting others via the site. Since it made sense to stoke the community, Hong and Young set up "Meet Me", which allowed users to commingle online. It was also a hedge against the porn operators, since a member couldn't post an ad and wait for email to roll in, but first had to engage in the community.

In April 2001, they instituted a $6-per-month fee to join "Meet Me", thinking it was cheap enough to qualify as an impulse buy. In its first month it generated $25,000 in revenue and by the year's end brought in $600,000. Their success spurred them to work even harder; most nights neither got much sleep. The site grew so big so quickly, and continued to attract visitors at an exponential rate, that it had achieved a point of non-displacement. This meant that virtually no one in the market could then knock them off their pedestal.

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Besides money and fame, the site offered other, fringe benefits.

It vastly improved their dating lives, for one: Hong could now afford a Porsche and was dating women way out of his league.

Initially his photo rated a 3.8, once plummeting to 2.6 after a particularly unfortunate haircut, while Young averaged 3.5. That changed after they inserted a link that said "Meet the guys that run HotOrNot" on the homepage and their scores rose. It figured, thought Hong; the more successful the site, the more money they made, the more famous they became, the hotter they got.

It took a while before Young and Hong were convinced that they had a viable business, even after venture capitalists expressed interest and Lycos offered them $2 million for it (they turned it down flat). There was nothing inherently viral about HotOrNot, it was simply compelling enough to induce people to spread the word.

Like any fad, Hong believed it would lose steam and their gravy train would run out of track. Young could then return to grad school to complete his dissertation, "Design and Specification of Heterogeneous Systems", and Hong would move on to other ventures, both of them richer and wiser. But in their first full year they pulled in $600,000 in almost pure profit, and doubled their revenue each and every year that followed. By 2004, the site generated more than $4 million annually, which the partners split in the form of dividends. In July 2006, the site tallied its 13-billionth vote and was the third most popular dating site on the internet. Two years later, they sold HotOrNot for $20 million.

As Hong and Young showed, simply by designing a product the right way it's possible to build a billion-dollar business from scratch: no advertising or marketing budget, no sales force, venture capitalists prepared to kill for the chance to throw money at you.

Some of the most iconic web 2.0 companies - Hotmail, eBay, PayPal, MySpace, YouTube, Facebook, Digg, Twitter and Flickr, as well as hundreds of widget-makers navigating the social-media economy - fit this description. The trick is that they created something people really wanted, so that their customers happily spread their product for them through their own networks of friends, family, colleagues and peers. That's one of the beautiful things about web 2.0: you can nurture a business like never before and achieve almost stratospheric valuations in record time.

These companies are powered by something called a "viral expansion loop", which is accomplished by incorporating virality into a product; in plain English, this means that a company grows because each new user begets more users. Just by using a product, they spread it. After all, what's the sense of being on Facebook if none of your friends have profiles, or of using Flickr if you cannot share your photos? Why post an item for sale on eBay if no one is around to bid for it, or use PayPal if no one accepts it?

It's not enough to click through photos on HotOrNot and vote on other people's relative attractiveness unless you can share the experience of doing so - and that's precisely what happened.

Within 90 minutes of HotOrNot hitting the web, its number of users doubled every two hours. On day two, they doubled every hour - breaking 100,000 users. For every ten visitors, two or three were - without prompting - passing the link to others, with this pattern replicating itself en masse. That's because in large numbers, human behaviour is largely predictable. We pass on interesting or funny memes or products to our social networks, whether they are in our email address books, friends on Facebook or participants on discussion threads.

Viral-loop businesses seek to take advantage of this trait.

While a negative-feedback loop can create a vicious circle and drive investors to dump stocks, further pushing down the market, leading to more bad news and inducing others to sell, a viral expansion loop is the opposite, a type of positive-feedback loop, a virtuous circle. The result is a kind of alchemy that, when done right, leads to a self-replicating, Borg-like growth. Put another way, a viral expansion loop is like compound interest on a bank account: one user becomes two, then four, eight, on to a million and more. It is not unlike taking a penny and doubling it every day for a month: by the end of a week you'd have 64 pence and within two weeks, £83.92; by day 30, the figure is about £5.4 million.

Viral loops have emerged as perhaps the most significant business accelerant to hit Silicon Valley since even the search engine.

Venture funds have been gravitating to companies with viral loops baked into their business models, inspired, no doubt, by the success of Peter Thiel, whose $500,000 investment in Facebook is worth anywhere between $300 million and $750 million (depending on how you value the company). Roelof Botha of Sequoia Capital, an early YouTube backer, has also placed his bets on viral loops.

Social-network creator Ning raised $104 million in venture capital and widget-maker Slide, which creates photo-slideshow tools, attracted $50 million from Fidelity Investments and T Rowe Price, giving it a $500 million valuation. Fred Wilson, managing partner at Union Square Ventures, jokes that he's considered changing his firm's name to "Viral Ventures", since almost two-thirds of the $20 million his firm invests goes to viral-loop companies such as Twitter.

Although the word "viral" has been co-opted from epidemiology to explain how things spread from user to user over the internet, there is a stark difference between virality online and what is found in nature. Most people do not spread viruses intentionally - it is a natural byproduct of being human. On the internet, however, users purposely (enthusiastically) disseminate ideas, information, opinions, links to blogs, photos, video and web services.

Entrepreneur Andrew Chen, a former advertising executive who worked with MySpace, hi5 and other social sites, views viral loops as "the most advanced direct marketing strategy being developed in the world right now". And make no mistake: viral expansion loops

are about marketing, just not in the traditional sense.

Just by using a product its users are, in essence, offering a testimonial.

Viral strategies aren't strictly for businesses. They are also seeping into other arenas - politics, for example. And no one was more successful in imprinting a viral loop into a campaign than Barack Obama. "One of my fundamental beliefs from my days as a community organiser is that real change comes from the bottom up," he said in a statement. "And there's no more powerful tool for grass-roots organising than the internet." Because an organisation can reach only so many people, it must turn to its loyal followers to widen that pool. As with all things viral, connecting to others outside the initial cluster of supporters depends on the quality of referrals. Friends, family and colleagues are far more credible than any ad that a marketing exec could dream up.

A pivotal moment came when the campaign hired Chris Hughes, the 24-year-old cofounder of Facebook. With the title of "Online Organising Guru", Hughes retrofitted grassroots campaigning to web 2.0 by weaving together social networks and the mobile internet into a central platform of Obama's campaign. The linchpin was my.BarackObama.com ("MyBo" for short), which functioned as a lively online community and social network, registering 1.5 million volunteers. Users created profiles with friend lists and blogs, joined one of the 27,000 groups that formed, raised money, and organised meetings through a Facebook-like interface. The site had a search function, enabling likeminded people to find each other; a page offering tools for creating a personal fundraising page ("You set your own goal, you do the outreach, and you get the credit for the results"); a blog and a forum. Each drove even more traffic to the site.

Leading up to the election MyBo members organised more than 200,000 campaign events, which didn't just energise Obama's support base but generated loads of cash. Over the span of two years, the campaign brought in $750 million from three million donors, with nine out of ten donations less than $100 (and half of $25 or less).

It achieved this by democratising its fundraising. Instead of turning to wealthy Americans, who could be seen as leveraging their privilege into power, Obama's campaign tapped the little guy, spreading donations across millions of Americans - giving each donor a stake in his success. In February 2008, his campaign raised $55 million online without its candidate attending a single fundraiser. What's more, while the law allowed large donors to contribute $2,300 for the 2008 primaries and the same for the general election, smaller donors were tapped repeatedly, forging a persistent connection with the candidate.

The campaign's viral strategies included a short, clear positioning statement as a call to arms. Unlike Hillary Clinton touting her "experience" or John McCain bragging that "I have the record and the scars to prove it", Obama's two core messages were "Change" and "Yes, we can". Obama's campaign galvanised its supporters while they, in turn, extended his message virally. It also relied on multiplier effects. During the campaign, will.i.am, frontman of the Black Eyed Peas, created a musical mashup based on Obama's phrase "Yes, we can" that included celebrities such as Scarlet Johansson. The campaign quickly embedded a link to the YouTube clip on its website. "After nearly a year on the campaign trail, I've seen a lot of things that have touched me deeply, but I had to share this with you," Michelle Obama wrote in an email to supporters. The video was viewed 20 million times. Another music video, I Got a Crush... on Obama, starring the bikiniclad "Obamagirl", was downloaded more than 13 million times. Fomenting the creativity of its supporters helped the Obama campaign to extend its message.

Other Obama viral tactics ran the gamut; the mobile arm of the campaign could text-message three million volunteers with schedules, speeches had video links, and a viral tell-a-friend mechanism made it simple to forward the site to another person's phone. To attend Obama rallies, participants were required to provide an email address and mobile numbers; just hours later, the campaign was already asking for donations and referrals to other friends. Viral schemes are not only applicable to politics and business, but are a natural fit for non-profit organisations. On Facebook, the most popular social application isn't a game or a mobile app, but Causes, which lets users promote a charity and encourage friends in their network to contribute. The mission of another organisation, JustGive, is to connect people with the charities and causes they care most about. The idea is simple: if 25 people make a donation and each convinces 25 others to donate, there is the potential for an exponential increase in both donors and donations.

There are three defined categories of viral expansion loops - "viral loops", "viral networks" and a hybrid of the two called "double viral loops". To create a simple viral loop is straightforward. In 1996, Hotmail placed a link in the body of every message, offering the recipient the ability to set up their own webmail account, and within 30 months went from zero to 30 million members. YouTube deployed a viral mechanism by allowing anyone to embed a video link in their blog or MySpace page: the more who saw it, the more links were embedded and soon millions of users were funnelled directly to YouTube. Also in this category are the scads of widget-makers creating digital bling for Facebook, MySpace and elsewhere: the infamous "hatching egg", glitzy slideshowcreation tools distributed by RockYou and Slide, the game Scrabulous, horoscopes and so on. But it's on the viral networks such as Facebook, MySpace, Twitter and LinkedIn that scale and power really snowball, providing an ecosystem in which other businesses can thrive too.

<img src="http://cdni.wired.co.uk/659x425/k_n/loops_inline2.gif" alt="Viral Loops 2"/> "The viral adoption model is the cheapest way to grow an audience," declares Union Square Ventures' Wilson. And the bigger a viral network gets, the faster it germinates. Once this growth kicks in it is possible to predict its rate with astonishing accuracy, because it spreads at an even rate to a point of non-displacement. Then it adds users even if it does nothing.

That's what makes viral loops so ingenious. Never before in human history has there been the potential to create wealth this fast, on this scale, starting with so little. Netscape founder Marc Andreessen's latest company Ning has been growing automagically since February 2007, when it launched its "Social Networks for Everything", a free platform for do-it-yourself social networks.

Within four months there were 60,000 Ning nets and by six months, 80,000. At the year's end there were 150,000, and 18 months into its run, roughly 325,000 - numbers increasing by about 2,000 a day.

As of April 2009, Ning counted 22 million users (adding two million every month), more than a million social networks (with 3,500 new groups being formed each day) and 2.7 billion page views the previous month. By the end of 2009, the site estimates that it will have as many as 50 million members and 2.5 million groups. Members from almost 200 countries have signed up, with the service already available in several languages, including Chinese, Japanese, Spanish and Dutch.

On its social networks, users post comments, questions, photos and videos. Topics run from parenting to Pez dispensers, TV shows to customised cars to Thai kickboxing. Over a two-month period almost 100,000 people joined the official fan site for the

Twilight saga. A Ning group can, in theory, serve as an artist-owned and -managed foundation for an entire business; and, collectively, the networks represent an ever-expanding commercial universe. Even within networks viral-growth dynamics persist. When a group registers 150 users, it reaches a point of non-displacement, continuing to grow even if organisers do not promote it.

That's because someone setting up a social network has no choice but to invite friends, family, colleagues and like-minded strangers to sign up, and each new member brings others. That pushes Ning's "viral coefficient" - the number of additional members each person brings in - way above one. This is key, because if the virality coefficient is one, the start-up will grow, but at a linear rate, eventually topping out. Above one, it achieves huge growth.

Starting with ten members and a viral coefficient of 0.6, you flatten out at 25 people, a gain of 15 users. At 0.9, you end up with 75 new members and growth slows dramatically. With a viral coefficient of 1.2, however, those same ten people yield 1,271 additional users. Expressed in a line graph, a viral coefficient of 1.2 follows an exponential curve.

With Ning, Andreessen estimates the viral coefficient as a whopping 2.0: each person who signs up is worth, on average, two more people (compounded daily). The next day she brings in four members and on day three, eight. Within a week: 128 people - each worth double her weight in virtual clones. The curve is almost twice as steep as the one that represents a viral coefficient of 1.2, which is how Ning has been able to double in size roughly every five months. "It's the power of compounding, predictable growth rates," says Gina Bianchini, Ning's cofounder and a former Goldman Sachs investment banker.

Bebo, Facebook, Friendster, Flickr, MySpace and YouTube don't create content - their audiences do. Would you tweet if no one else were on Twitter? These viral-loop companies provide an environment that is, in theory, infinitely scalable, relying on crowds to create masses of content. The more material, the stronger the lure for those on the sidelines, the more value for the company.

There is also a multiplier effect, because the bigger the viral network, the faster it grows: eBay went from online garage sale to megasite because sellers attracted buyers who attracted more sellers and more buyers. Google has pursued a similar strategy beyond search: under every set of ads it serves up sits a link to its AdSense program, which encourages more website owners to join.

The same mechanisms are at work with the spread of any network, whether it is the telephone, mobile, instant messaging, email or Skype. Each additional user is worth more than any individual user.

Eventually almost everyone joins such a network, just as everyone has a telephone or email address; the value of taking part is so huge as a result of everyone else being on it.

As the internet continues to become more mobile, gradually untethering from the desktop, this viral plain is both breaking up and expanding. It will offer a far greater, more diffuse surface area for ideas to spread virally. About 30 million smart phones were sold in 2005. By 2010, an estimated 260 million will be in circulation and they will outsell land-bound PCs. The internet means that anyone, anywhere can tap into this informational grid, with millions of memes spreading from screen to screen to screen.

This yields almost limitless levels of virality. It's a huge business opportunity.